Premium Audits – Helpful Tips to Assure a Smooth Audit

“Hi, my name is John Smith from the Anystate Insurance Company, and I need to schedule a premium audit.” Sound familiar? Do you immediately think of reasons to put him off? Are they legitimate reasons or are you just horrified to think of what it entails? Of course, if business is down (lower sales/payrolls), then you can’t wait to get him in, because that means return premiums. Audits aren’t something to be feared. If you are properly informed and prepared, the audit process is something that should run smoothly for both parties.

The first question with any audit is what type of audit is going to be done. There are three ways to do an audit: mail form, telephone audit or a physical audit. The mail audit is for smaller employers and that form is normally sent out 10 days prior to expiration. If there is no reply, then a second notice is sent after 30 days. Trust me; don’t let it go beyond that. Telephone audits are self explanatory, for obvious reasons. Lastly, and more prominent, is the physical audit. This is when the auditor comes out to “physically” examine your books/records. I’m sure most of you are very familiar with this method.

For the sake of this discussion, I’m going to emphasize general liability and workers compensation audits. You should also be aware of automobile audits, but those are only for employers with large fleets written on a composite rate.

So you’ve scheduled an appointment with the premium auditor. Now what? If it’s a payroll audit, you should have the payroll summary, checkbook or cash disbursement journal (pay any subcontractors?), and your 941’s. If you want things to go smoothly, make sure your payroll summary reconciles with your 941’s.

If you used any subcontractors during the year, make sure you have certificates of insurance for all of them; and also make sure they have adequate limits. If the limits are less than required by your insurer, those subs’ payrolls will be put into the appropriate classification, and you will be charged for them. It goes without saying, that if you don’t have certificates for your subs, you will be charged for their payroll. If you are involved in OCIP’s, make sure you have the certified payrolls because these payrolls are excluded under your policy. It is important to make sure your payroll (or sales) records are accurate for each class code. The auditor needs exact numbers not percentages. If you are eligible for a construction credit, make sure you have the confirmation from the WC Bureau, as well as your own documentation to substantiate the credit.

There are important exclusions you should be aware of with a payroll audit. They include: overtime premium pay, severance pay, tips and gratuities, payment for military duty, uniform allowances, incentive vacations, club memberships, entertainment expenses and stock options (if run through payroll), but not stock bonuses.

On the flip side, there are important inclusions you should be aware of as well. They include: bonuses, commissions and draws against commissions, holidays pay, vacation pay, Davis Bacon Act wages, and section 125 plans.

If you are having a sales audit, make sure you separate out the foreign sales because you pay a lower rate (products portion). You’ll want to make sure your sales ledger is accurate because that is what the auditor is going to use for the audit. It is also important to know what is excluded in a sales audit. For instance, sales or excise taxes that are submitted to the government, finance charges, returns or allowances (or repossessed property) and freight charges (if shown separately on the invoice) are all excluded. Gas taxes are not excluded because they are not collected separately.

Proper documentation for the audit is very important, but equally important are the things you should definitely not do. They include: blow off an appointment, be confrontational, and lastly, but most importantly, don’t be dishonest and try to improperly classify employees. Intentional, improper classification of employees is a guarantee for trouble. Don’t do it!

If for some reason you don’t agree with an audit, you can dispute it. You will need to put the disagreement in writing and be specific as to why you disagree with the audit. Do it early. Don’t wait until the last minute to address the issue because insurers know that this is a typical stall tactic used by insured’s. Insurers are usually pretty good about responding within 48 hours.

In summary, audits shouldn’t be something to fear, unless of course you are trying to hide something. If you have the proper information, in the proper format, the audit process should run smoothly.

By Chris Sheppard

Chris Sheppard, CPCU, AFSB is VP of Sales for Smith Buckley & Hunt Insurance Agency in Brockton, MA. To learn more please visit http://www.sbhins.com You may also contact Chris directly at chris@sbhins.com